[ G.R. No.

148753, July 30, 2004 ]

NEW SAMPAGUITA BUILDERS CONSTRUCTION, INC. (NSBCI) AND SPOUSES EDUARDO R. DEE AND
ARCELITA M. DEE, PETITIONERS, VS. PHILIPPINE NATIONAL BANK, RESPONDENT.

DECISION

PANGANIBAN, J.:
Courts have the authority to strike down or to modify provisions in promissory notes that grant the
lenders unrestrained power to increase interest rates, penalties and other charges at the latter's sole
discretion and without giving prior notice to and securing the consent of the borrowers. This unilateral
authority is anathema to the mutuality of contracts and enable lenders to take undue advantage of
borrowers. Although the Usury Law has been effectively repealed, courts may still reduce iniquitous or
unconscionable rates charged for the use of money. Furthermore, excessive interests, penalties and
other charges not revealed in disclosure statements issued by banks, even if stipulated in the promissory
notes, cannot be given effect under the Truth in Lending Act.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to nullify the June 20,
2001 Decision[2] of the Court of Appeals[3] (CA) in CA-GR CV No. 55231. The decretal portion of the
assailed Decision reads as follows:
"WHEREFORE, the decision of the Regional Trial Court of Dagupan City, Branch 40 dated December 28,
1995 is REVERSED and SET ASIDE. The foreclosure proceedings of the mortgaged properties of
defendants-appellees[4] and the February 26, 1992 auction sale are declared legal and valid and said
defendants-appellees are ordered to pay plaintiff-appellant PNB,[5] jointly and severally[,] the amount of
deficiency that will be computed by the trial court based on the original penalty of 6% per annum as
explicitly stated in the loan documents and to pay attorney's fees in an amount equivalent to x x x 1% of
the total amount due and the costs of suit and expenses of litigation."[6]
The Facts

The facts are narrated by the CA as follows:

"On February 11, 1989, Board Resolution No. 05, Series of 1989 was approved by [Petitioner] NSBCI [1)]
authorizing the company to x x x apply for or secure a commercial loan with the PNB in an aggregate
amount of P8.0M, under such terms agreed by the Bank and the NSBCI, using or mortgaging the real
estate properties registered in the name of its President and Chairman of the Board [Petitioner] Eduardo
R. Dee as collateral; [and] 2) authorizing [petitioner-spouses] to secure the loan and to sign any [and all]
documents which may be required by [Respondent] PNB[,] and that [petitioner-spouses] shall act as
sureties or co-obligors who shall be jointly and severally liable with [Petitioner] NSBCI for the payment
of any [and all] obligations.

"On August 15, 1989, Resolution No. 77 was approved by granting the request of [Respondent] PNB thru
its Board NSBCI for an P8 Million loan broken down into a revolving credit line of P7.7M and an
unadvised line of P0.3M for additional operating and working capital[7] to mobilize its various
construction projects, namely:
 '1)MWSS Watermain;
2) NEA-Liberty farm;
3) Olongapo City Pag-Asa Public Market;
4) Renovation of COA-NCR Buildings 1, 2 and 9;
5) Dupels, Inc., Extensive prawn farm development project;
6) Banawe Hotel Phase II;
7) Clark Air Base -- Barracks and Buildings; and
Others: EDSA Lighting, Roxas Blvd. Painting NEA Sapang Palay and Angeles
8)
City.'
"The loan of [Petitioner] NSBCI was secured by a first mortgage on the following: a) three (3) parcels of
residential land located at Mangaldan, Pangasinan with total land area of 1,214 square meters[,]
including improvements thereon and registered under TCT Nos. 128449, 126071, and 126072 of the
Registry of Deeds of Pangasinan; b) six (6) parcels of residential land situated at San Fabian, Pangasinan
with total area of 1,767 square meters[,] including improvements thereon and covered by TCT Nos.
144006, 144005, 120458, 120890, 144161[,] and 121127 of the Registry of Deeds of Pangasinan; and c) a
residential lot and improvements thereon located at Mangaldan, Pangasinan with an area of 4,437
square meters and covered by TCT No. 140378 of the Registry of Deeds of Pangasinan.

"The loan was further secured by the joint and several signatures of [Petitioners] Eduardo Dee and
Arcelita Marquez Dee, who signed as accommodation-mortgagors since all the collaterals were owned
by them and registered in their names.

"Moreover [Petitioner] NSBCI executed the following documents, viz: a) promissory note dated June 29,
1989 in the amount of P5,000,000.00 with due date on October 27, 1989; [b)] promissory note dated
September 1, 1989 in the amount of P2,700,000.00 with due date on December 30, 1989; and c)
promissory note dated September 6, 1989 in the amount of P300,000.00 with maturity date on January
4, 1990.

"In addition, [petitioner] corporation also signed the Credit Agreement dated August 31, 1989 relating to
the 'revolving credit line' of P7.7 Million x x x and the Credit Agreement dated September 5, 1989 to
support the 'unadvised line' of P300,000.00.

"On August 31, 1989, [petitioner-spouses] executed a 'Joint and Solidary Agreement' (JSA) in favor of
[Respondent] PNB 'unconditionally and irrevocably binding themselves to be jointly and severally liable
with the borrower for the payment of all sums due and payable to the Bank under the Credit
Document.'

"Later on, [Petitioner] NSBCI failed to comply with its obligations under the promissory notes.

"On June 18, 1991, [Petitioner] Eduardo R. Dee on behalf of [Petitioner] NSBCI sent a letter to the
Branch Manager of the PNB Dagupan Branch requesting for a 90-day extension for the payment of
interests and restructuring of its loan for another term.

"Subsequently, NSBCI tendered payment to [Respondent] PNB [of] three (3) checks
aggregating P1,000,000.00, namely 1) check no. 316004 dated August 8, 1991 in the amount
of P200,000.00; 2) check no. 03499997 dated August 8, 1991 in the amount of P650,000.00; and 3)
check no. 03499998 dated August 15, 1991 in the amount of P150,000.00.[8]
"In a meeting held on August 12, 1991, [Respondent] PNB's representative[,] Mr. Rolly Cruzabra, was
informed by [Petitioner] Eduardo Dee of his intention to remit to [Respondent] PNB post-dated checks
covering interests, penalties and part of the loan principals of his due account.

"On August 22, 1991, [Respondent] bank's Crispin Carcamo wrote [Petitioner] Eduardo Dee[,] informing
him that [Petitioner] NSBCI's proposal [was] acceptable[,] provided the total payment should
be P4,128,968.29 that [would] cover the amount of P1,019,231.33 as principal, P3,056,058.03 as
interests and penalties[,] and P53,678.93 for insurance[,] with the issuance of post-dated checks to be
dated not later than November 29, 1991.

"On September 6, 1991, [Petitioner] Eduardo Dee wrote the PNB Branch Manager reiterating his
proposals for the settlement of [Petitioner] NSBCI's past due loan account amounting to P7,019,231.33.

"[Petitioner] Eduardo Dee later tendered four (4) post-dated Interbank checks
aggregating P1,111,306.67 in favor of [Respondent] PNB, viz:

'Check No. Date Amount

03500087 Sept. 29, 1991 P277,826.70
03500088 Oct. 29, 1991 P277,826.70
03500089 Nov. 29, 1991 P277,826.70
03500090 Dec. 20, 1991 P277,826.57'

"Upon presentment[,] however, x x x check nos. 03500087 and 03500088 dated September 29 and
October 29, 1991 were dishonored by the drawee bank and returned due [to] a 'stop payment' order
from [petitioners].

"On November 12, 1991, PNB's Mr. Carcamo wrote [Petitioner] Eduardo Dee informing him that unless
the dishonored checks [were] made good, said PNB branch 'shall recall its recommendation to the Head
Office for the restructuring of the loan account and refer the matter to its legal counsel for legal
action.['] [Petitioners] did not heed [respondent's] warning and as a result[,] the PNB Dagupan Branch
sent demand letters to [Petitioner] NSBCI at its office address at 1611 ERDC Building, E. Rodriguez Sr.
Avenue, Quezon City[,] asking it to settle its past due loan account.

"[Petitioners] nevertheless failed to pay their loan obligations within the [timeframe] given them and as
a result, [Respondent] PNB filed with the Provincial Sheriff of Pangasinan at Lingayen a Petition for Sale
under Act 3135, as amended[,] and Presidential Decree No. 385 dated January 30, 1992.

"The notice of extra-judicial sale of the mortgaged properties relating to said PNB's [P]etition for [S]ale
was published in the February 8, 15 and 22, 1992 issues of the Weekly Guardian, allegedly a newspaper
of general circulation in the Province of Pangasinan, including the cities of Dagupan and San Carlos. In
addition[,] copies of the notice were posted in three (3) public places[,] and copies thereof furnished
[Petitioner] NSBCI at 1611 [ERDC Building,] E. Rodriguez Sr. Avenue, Quezon City, [and at] 555 Shaw
Blvd., Mandaluyong[, Metro Manila;] and [Petitioner] Sps. Eduardo and Arcelita Dee at 213 Wilson St.,
San Juan, Metro Manila.

"On February 26, 1992, the Provincial Deputy Sheriff Cresencio F. Ferrer of Lingayen, Pangasinan
foreclosed the real estate mortgage and sold at public auction the mortgaged properties of [petitioner-
spouses,] with [Respondent] PNB being declared the highest bidder for the amount of P10,334,000.00.
"On March 2, 1992, copies of the Sheriff's Certificate of Sale were sent by registered mail to [petitioner]
corporation's address at 1611 [ERDC Building,] E. Rodriguez Sr. Avenue, Quezon City and [petitioner-
spouses'] address at 213 Wilson St., San Juan, Metro Manila.

"On April 6, 1992, the PNB Dagupan Branch Manager sent a letter to [petitioners] at their address at
1611 [ERDC Building,] E. Rodriguez Sr. Avenue, Quezon City[,] informing them that the properties
securing their loan account [had] been sold at public auction, that the Sheriff's Certificate of Sale had
been registered with the Registry of Deeds of Pangasinan on March 13, 1992[,] and that a period of one
(1) year therefrom [was] granted to them within which to redeem their properties.

"[Petitioners] failed to redeem their properties within the one-year redemption period[,] and so
[Respondent] PNB executed a [D]eed of [A]bsolute [S]ale consolidating title to the properties in its name.
TCT Nos. 189935 to 189944 were later issued to [Petitioner] PNB by the Registry of Deeds of Pangasinan.

"On August 4, 1992, [Respondent] PNB informed [Petitioner] NSBCI that the proceeds of the sale
conducted on February 26, 1992 were not sufficient to cover its total claim amounting
to P12,506,476.43[,] and thus demanded from the latter the deficiency ofP2,172,476.43 plus interest
and other charges[,] until the amount [was] fully paid.

"[Petitioners] refused to pay the above deficiency claim which compelled [Respondent] PNB to institute
the instant [C]omplaint for the collection of its deficiency claim.

"Finding that the PNB debt relief package automatically [granted] to [Petitioner] NSBCI the benefits
under the program, the court a quo ruled in favor of [petitioners] in its Decision dated December 28,
1995, the fallo of which reads:
'In view of the foregoing, the Court believes and so holds that the [respondent] has no cause of action
against the [petitioners].

'WHEREFORE, the case is hereby DISMISSED, without costs.'"[9]

On appeal, respondent assailed the trial court's Decision dismissing its deficiency claim on the mortgage
debt. It also challenged the ruling of the lower court that Petitioner NSBCI's loan account was bloated,
and that the inadequacy of the bid price was sufficient to set aside the auction sale.

Ruling of the Court of Appeals

Reversing the trial court, the CA held that Petitioner NSBCI did not avail itself of respondent's debt relief
package (DRP) or take steps to comply with the conditions for qualifying under the program. The
appellate court also ruled that entitlement to the program was not a matter of right, because such
entitlement was still subject to the approval of higher bank authorities, based on their assessment of the
borrower's repayment capability and satisfaction of other requirements.

As to the misapplication of loan payments, the CA held that the subsidiary ledgers of NSBCI's loan
accounts with respondent reflected all the loan proceeds as well as the partial payments that had been
applied either to the principal or to the interests, penalties and other charges. Having been made in the
ordinary and usual course of the banking business of respondent, its entries were presumed accurate,
regular and fair under Section 5(q) of Rule 131 of the Rules of Court. Petitioners failed to rebut this
presumption.
The increases in the interest rates on NSBCI's loan were also held to be authorized by law and the
Monetary Board and -- like the increases in penalty rates -- voluntarily and freely agreed upon by the
parties in the Credit Agreements they executed. Thus, these increases were binding upon petitioners.

However, after considering that two to three of Petitioner NSBCI's projects covered by the loan were
affected by the economic slowdown in the areas near the military bases in the cities of Angeles and
Olongapo, the appellate court annulled and deleted the adjustment in penalty from 6 percent to 36
percent per annum. Not only did respondent fail to demonstrate the existence of market forces and
economic conditions that would justify such increases; it could also have treated petitioners' request for
restructuring as a request for availment of the DRP. Consequently, the original penalty rate of 6 percent
per annum was used to compute the deficiency claim.

The auction sale could not be set aside on the basis of the inadequacy of the auction price, because in
sales made at public auction, the owner is given the right to redeem the mortgaged properties; the
lower the bid price, the easier it is to effect redemption or to sell such right. The bid price
of P10,334,000.00 vis-à-vis respondent's claim of P12,506,476.43 was found to be neither shocking nor
unconscionable.

The attorney's fees were also reduced by the appellate court from 10 percent to 1 percent of the total
indebtedness. First, there was no extreme difficulty in an extrajudicial foreclosure of a real estate
mortgage, as this proceeding was merely administrative in nature and did not involve a court litigation
contesting the proceedings prior to the auction sale. Second, the attorney's fees were exclusive of all
stipulated costs and fees. Third, such fees were in the nature of liquidated damages that did not inure to
respondent's salaried counsel.

Respondent was also declared to have the unquestioned right to foreclose the Real Estate Mortgage. It
was allowed to recover any deficiency in the mortgage account not realized in the foreclosure sale, since
petitioner-spouses had agreed to be solidarily liable for all sums due and payable to respondent.

Finally, the appellate court concluded that the extrajudicial foreclosure proceedings and auction sale
were valid for the following reasons: (1) personal notice to the mortgagors, although unnecessary, was
actually made; (2) the notice of extrajudicial sale was duly published and posted; (3) the extrajudicial
sale was conducted through the deputy sheriff, under the direction of the clerk of court who was
concurrently the ex-oficio provincial sheriff and acting as agent of respondent; (4) the sale was
conducted within the province where the mortgaged properties were located; and (5) such sale was not
shown to have been attended by fraud.

Hence this Petition.[10]

Issues

Petitioners submit the following issues for our consideration:

"I

Whether or not the Honorable Court of Appeals correctly ruled that petitioners did not avail of PNB's
debt relief package and were not entitled thereto as a matter of right.
"II

Whether or not petitioners have adduced sufficient and convincing evidence to overthrow the
presumption of regularity and correctness of the PNB entries in the subsidiary ledgers of the loan
accounts of petitioners.

"III

Whether or not the Honorable Court of Appeals seriously erred in not holding that the Respondent PNB
bloated the loan account of petitioner corporation by imposing interests, penalties and attorney's fees
without legal, valid and equitable justification.

"IV

Whether or not the auction price at which the mortgaged properties was sold was disproportionate to
their actual fair mortgage value.

"V

Whether or not Respondent PNB is not entitled to recover the deficiency in the mortgage account not
realized in the foreclosure sale, considering that:

A. Petitioners are merely guarantors of the mortgage debt of petitioner corporation which has a
separate personality from the [petitioner-spouses].
B.
C. The joint and solidary agreement executed by [petitioner- spouses] are contracts of adhesion
not binding on them;
D.
E. The NSBCI Board Resolution is not valid and binding on [petitioner-spouses] because they were
compelled to execute the said Resolution[;] otherwise[,] Respondent PNB would not grant
petitioner corporation the loan;
F.
G. The Respondent PNB had already in its possession the properties of the [petitioner-spouses]
which served as a collateral to the loan obligation of petitioner corporation[,] and to still allow
Respondent PNB to recover the deficiency claim amounting to a very substantial amount of P2.1
million would constitute unjust enrichment on the part of Respondent PNB.

"VI

Whether or not the extrajudicial foreclosure proceedings and auction sale, including all subsequent
proceedings[,] are null and void for non-compliance with jurisdictional and other mandatory
requirements; whether or not the petition for extrajudicial foreclosure of mortgage was filed
prematurely; and whether or not the finding of fraud by the trial court is amply supported by the
evidence on record."[11]
The foregoing may be summed up into two main issues: first, whether the loan accounts are bloated;
and second, whether the extrajudicial foreclosure and subsequent claim for deficiency are valid and
proper.

The Court's Ruling

The Petition is partly meritorious.

First Main Issue:

Bloated Loan Accounts

At the outset, it must be stressed that only questions of law[12] may be raised in a petition for review on
certiorari under Rule 45 of the Rules of Court. As a rule, questions of fact cannot be the subject of this
mode of appeal,[13] for "[t]he Supreme Court is not a trier of facts."[14] As exceptions to this rule,
however, factual findings of the CA may be reviewed on appeal[15] when, inter alia, the factual inferences
are manifestly mistaken;[16] the judgment is based on a misapprehension of facts;[17] or the CA manifestly
overlooked certain relevant and undisputed facts that, if properly considered, would justify a different
legal conclusion.[18] In the present case, these exceptions exist in various instances, thus prompting us to
take cognizance of factual issues and to decide upon them in the interest of justice and in the exercise of
our sound discretion.[19]

Indeed, Petitioner NSBCI's loan accounts with respondent appear to be bloated with some iniquitous
imposition of interests, penalties, other charges and attorney's fees. To demonstrate this point, the
Court shall take up one by one the promissory notes, the credit agreements and the disclosure
statements.

Increases in Interest Baseless

Promissory Notes. In each drawdown, the Promissory Notes specified the interest rate to be charged:
19.5 percent in the first, and 21.5 percent in the second and again in the third. However, a uniform
clause therein permitted respondent to increase the rate "within the limits allowed by law at any time
depending on whatever policy it may adopt in the future x x x,"[20] without even giving prior notice to
petitioners. The Court holds that petitioners' accessory duty to pay interest[21] did not give respondent
unrestrained freedom to charge any rate other than that which was agreed upon. No interest shall be
due, unless expressly stipulated in writing.[22] It would be the zenith of farcicality to specify and agree
upon rates that could be subsequently upgraded at whim by only one party to the agreement.

The "unilateral determination and imposition"[23] of increased rates is "violative of the principle of
mutuality of contracts ordained in Article 1308[24] of the Civil Code."[25] One-sided impositions do not
have the force of law between the parties, because such impositions are not based on the parties'
essential equality.

Although escalation clauses[26] are valid in maintaining fiscal stability and retaining the value of money
on long-term contracts,[27]giving respondent an unbridled right to adjust the interest independently and
upwardly would completely take away from petitioners the "right to assent to an important
modification in their agreement"[28] and would also negate the element of mutuality in their contracts.
The clause cited earlier made the fulfillment of the contracts "dependent exclusively upon the
uncontrolled will"[29] of respondent and was therefore void. Besides, the pro forma promissory notes
have the character of a contract d'adhésion,[30] "where the parties do not bargain on equal footing, the
weaker party's [the debtor's] participation being reduced to the alternative 'to take it or leave it.'"[31]
"While the Usury Law[32] ceiling on interest rates was lifted by [Central Bank] Circular No. 905,[33] nothing
in the said Circular grants lenders carte blanche authority to raise interest rates to levels which will
either enslave their borrowers or lead to a hemorrhaging of their assets."[34] In fact, we have declared
nearly ten years ago that neither this Circular nor PD 1684, which further amended the Usury Law,
"authorized either party to unilaterally raise the interest rate without the other's consent."[35]

Moreover, a similar case eight years ago pointed out to the same respondent (PNB) that borrowing
signified a capital transfusion from lending institutions to businesses and industries and was done for
the purpose of stimulating their growth; yet respondent's continued "unilateral and lopsided
policy"[36] of increasing interest rates "without the prior assent"[37] of the borrower not only defeats this
purpose, but also deviates from this pronouncement. Although such increases are not usurious, since
the "Usury Law is now legally inexistent"[38] -- the interest ranging from 26 percent to 35 percent in the
statements of account[39] -- "must be equitably reduced for being iniquitous, unconscionable and
exorbitant."[40] Rates found to be iniquitous or unconscionable are void, as if it there were no express
contract thereon.[41] Above all, it is undoubtedly against public policy to charge excessively for the use of
money.[42]

It cannot be argued that assent to the increases can be implied either from the June 18, 1991 request of
petitioners for loan restructuring or from their lack of response to the statements of account sent by
respondent. Such request does not indicate any agreement to an interest increase; there can be no
implied waiver of a right when there is no clear, unequivocal and decisive act showing such
purpose.[43] Besides, the statements were not letters of information sent to secure their conformity; and
even if we were to presume these as an offer, there was no acceptance. No one receiving a proposal to
modify a loan contract, especially interest -- a vital component -- is "obliged to answer the proposal."[44]

Furthermore, respondent did not follow the stipulation in the Promissory Notes providing for the
automatic conversion of the portion that remained unpaid after 730 days -- or two years from date of
original release --into a medium-term loan, subject to the applicable interest rate to be applied from the
dates of original release.[45]

In the first,[46] second[47] and third[48] Promissory Notes, the amount that remained unpaid as of October
27, 1989, December 1989 and January 4, 1990 -- their respective due dates -- should have been
automatically converted by respondent into medium-term loans on June 30, 1991, September 2, 1991,
and September 7, 1991, respectively. And on this unpaid amount should have been imposed the same
interest rate charged by respondent on other medium-term loans; and the rate applied from June 29,
1989, September 1, 1989 and September 6, 1989 -- their respective original release --until paid. But
these steps were not taken. Aside from sending demand letters, respondent did not at all exercise its
option to enforce collection as of these Notes' due dates. Neither did it renew or extend the account.

In these three Promissory Notes, evidently, no complaint for collection was filed with the courts. It was
not until January 30, 1992 that a Petition for Sale of the mortgaged properties was filed -- with the
provincial sheriff, instead.[49] Moreover, respondent did not supply the interest rate to be charged on
medium-term loans granted by automatic conversion. Because of this deficiency, we shall use the legal
rate of 12 percent per annum on loans and forbearance of money, as provided for by CB Circular 416.[50]

Credit Agreements. Aside from the promissory notes, another main document involved in the principal
obligation is the set of credit agreements executed and their annexes.
The first Credit Agreement[51] dated June 19, 1989 -- although offered and admitted in evidence, and
even referred to in the first Promissory Note -- cannot be given weight.

First, it was not signed by respondent through its branch manager.[52] Apparently it was surreptitiously
acknowledged before respondent's counsel, who unflinchingly declared that it had been signed by the
parties on every page, although respondent's signature does not appear thereon.[53]

Second, it was objected to by petitioners,[54] contrary to the trial court's findings.[55] However, it was not
the Agreement, but the revolving credit line[56] of P5,000,000, that expired one year from the
Agreement's date of implementation.[57]

Third, there was no attached annex that contained the General Conditions.[58] Even the
Acknowledgment did not allude to its existence.[59] Thus, no terms or conditions could be added to the
Agreement other than those already stated therein.

Since the first Credit Agreement cannot be given weight, the interest rate on the first availment pegged
at 3 percent over and above respondent's prime rate[60] on the date of such availment[61] has no bearing
at all on the loan. After the first Note's due date, the rate of 19 percent agreed upon should continue to
be applied on the availment, until its automatic conversion to a medium-term loan.

The second Credit Agreement[62] dated August 31, 1989, provided for interest -- respondent's prime rate,
plus the applicable spread[63]in effect as of the date of each availment,[64] on a revolving credit line
of P7,700,000[65] -- but did not state any provision on its increase or decrease.[66] Consequently,
petitioners could not be made to bear interest more than such prime rate plus spread. The Court gives
weight to this second Credit Agreement for the following reasons.

First, this document submitted by respondent was admitted by petitioners.[67] Again, contrary to their
assertion, it was not the Agreement -- but the credit line -- that expired one year from the Agreement's
date of implementation.[68] Thus, the terms and conditions continued to apply, even if drawdowns could
no longer be made.

Second, there was no 7-page annex[69] offered in evidence that contained the General
Conditions,[70] notwithstanding the Acknowledgment of its existence by respondent's counsel. Thus, no
terms or conditions could be appended to the Agreement other than those specified therein.

Third, the 12-page General Conditions[71] offered and admitted in evidence had no probative value.
There was no reference to it in the Acknowledgment of the Agreement; neither was respondent's
signature on any of the pages thereof. Thus, the General Conditions' stipulations on interest
adjustment,[72] whether on a fixed or a floating scheme, had no effect whatsoever on the Agreement.
Contrary to the trial court's findings,[73] the General Condition were correctly objected to by
petitioners.[74] The rate of 21.5 percent agreed upon in the second Note thus continued to apply to the
second availment, until its automatic conversion into a medium-term loan.

The third Credit Agreement[75] dated September 5, 1989, provided for the same rate of interest as that in
the second Agreement. This rate was to be applied to availments of an unadvised line of P300,000. Since
there was no mention in the third Agreement, either, of any stipulation on increases or decreases[76] in
interest, there would be no basis for imposing amounts higher than the prime rate plus spread. Again,
the 21.5 percent rate agreed upon would continue to apply to the third availment indicated in the third
Note, until such amount was automatically converted into a medium-term loan.

The Court also finds that, first, although this document was admitted by petitioners,[77] it was the credit
line that expired one year from the implementation of the Agreement.[78] The terms and conditions
therein continued to apply, even if availments could no longer be drawn after expiry.

Second, there was again no 7-page annex[79] offered that contained the General
Conditions,[80] regardless of the Acknowledgment by the same respondent's counsel affirming its
existence. Thus, the terms and conditions in this Agreement relating to interest cannot be expanded
beyond that which was already laid down by the parties.

Disclosure Statements. In the present case, the Disclosure Statements[81] furnished by respondent set
forth the same interest rates as those respectively indicated in the Promissory Notes. Although no
method of computation was provided showing how such rates were arrived at, we will nevertheless take
up the Statements seriatim in order to determine the applicable rates clearly.

As to the first Disclosure Statement on Loan/Credit Transaction[82] dated June 13, 1989, we hold that the
19.5 percent effective interest rate per annum[83] would indeed apply to the first availment or
drawdown evidenced by the first Promissory Note. Not only was this Statement issued prior to the
consummation of such availment or drawdown, but the rate shown therein can also be considered
equivalent to 3 percent over and above respondent's prime rate in effect. Besides, respondent
mentioned no other rate that it considered to be the prime rate chargeable to petitioners. Even if we
disregarded the related Credit Agreement, we assume that this private transaction between the parties
was fair and regular,[84] and that the ordinary course of business was followed.[85]

As to the second Disclosure Statement on Loan/Credit Transaction[86] dated September 2, 1989, we hold
that the 21.5 percent effective interest rate per annum[87] would definitely apply to the second
availment or drawdown evidenced by the second Promissory Note. Incidentally, this Statement was
issued only after the consummation of its related availment or drawdown, yet such rate can be deemed
equivalent to the prime rate plus spread, as stipulated in the corresponding Credit Agreement. Again,
we presume that this private transaction was fair and regular, and that the ordinary course of business
was followed. That the related Promissory Note was pre-signed would also bolster petitioners' claim
although, under cross-examination Efren Pozon -- Assistant Department Manager I[88] of PNB, Dagupan
Branch -- testified that the Disclosure Statements were the basis for preparing the Notes.[89]

As to the third Disclosure Statement on Loan/Credit Transaction[90] dated September 6, 1989, we hold
that the same 21.5 percent effective interest rate per annum[91] would apply to the third availment or
drawdown evidenced by the third Promissory Note. This Statement was made available to petitioner-
spouses, only after the related Credit Agreement had been executed, but simultaneously with the
consummation of the Statement's related availment or drawdown. Nonetheless, the rate herein should
still be regarded as equivalent to the prime rate plus spread, under the similar presumption that this
private transaction was fair and regular and that the ordinary course of business was followed.

In sum, the three disclosure statements, as well as the two credit agreements considered by this Court,
did not provide for any increase in the specified interest rates. Thus, none would now be permitted.
When cross-examined, Julia Ang-Lopez, Finance Account Analyst II of PNB, Dagupan Branch, even
testified that the bases for computing such rates were those sent by the head office from time to time,
and not those indicated in the notes or disclosure statements.[92]

In addition to the preceding discussion, it is then useless to belabor the point that the increase in rates
violates the impairment[93] clause of the Constitution,[94] because the sole purpose of this provision is to
safeguard the integrity of valid contractual agreements against unwarranted interference by the
State[95] in the form of laws. Private individuals' intrusions on interest rates is governed by statutory
enactments like the Civil Code.

Penalty, or Increases
Thereof, Unjustified

No penalty charges or increases thereof appear either in the Disclosure Statements[96] or in any of the
clauses in the second and the third Credit Agreements[97] earlier discussed. While a standard penalty
charge of 6 percent per annum has been imposed on the amounts stated in all three Promissory Notes
still remaining unpaid or unrenewed when they fell due,[98] there is no stipulation therein that would
justify any increase in that charges. The effect, therefore, when the borrower is not clearly informed of
the Disclosure Statements -- prior to the consummation of the availment or drawdown -- is that the
lender will have no right to collect upon such charge[99] or increases thereof, even if stipulated in the
Notes. The time is now ripe to give teeth to the often ignored forty-one-year old "Truth in Lending
Act"[100] and thus transform it from a snivelling paper tiger to a growling financial watchdog of hapless
borrowers.

Besides, we have earlier said that the Notes are contracts of adhesion; although not invalid per se, any
apparent ambiguity in the loan contracts -- taken as a whole -- shall be strictly construed against
respondent who caused it.[101] Worse, in the statements of account, the penalty rate has again been
unilaterally increased by respondent to 36 percent without petitioners' consent. As a result of its move,
such liquidated damages intended as a penalty shall be equitably reduced by the Court to zilch[102] for
being iniquitous or unconscionable.[103]

Although the first Disclosure Statement was furnished Petitioner NSBCI prior to the execution of the
transaction, it is not a contract that can be modified by the related Promissory Note, but a mere
statement in writing that reflects the true and effective cost of loans from respondent. Novation can
never be presumed,[104] and the animus novandi "must appear by express agreement of the parties, or
by their acts that are too clear and unequivocal to be mistaken."[105] To allow novation will surely flout
the "policy of the State to protect its citizens from a lack of awareness of the true cost of credit."[106]

With greater reason should such penalty charges be indicated in the second and third Disclosure
Statements, yet none can be found therein. While the charges are issued after the respective availment
or drawdown, the disclosure statements are given simultaneously therewith. Obviously, novation still
does not apply.

Other Charges Unwarranted

In like manner, the other charges imposed by respondent are not warranted. No particular values or
rates of service charge are indicated in the Promissory Notes or Credit Agreements, and no total value or
even the breakdown figures of such non-finance charge are specified in the Disclosure Statements.
Moreover, the provision in the Mortgage that requires the payment of insurance and other charges is
neither made part of nor reflected in such Notes, Agreements, or Statements.[107]
Attorney's Fees Equitably Reduced

We affirm the equitable reduction in attorney's fees.[108] These are not an integral part of the cost of
borrowing, but arise only when collecting upon the Notes becomes necessary. The purpose of these fees
is not to give respondent a larger compensation for the loan than the law already allows, but to protect
it against any future loss or damage by being compelled to retain counsel in-house or not -- to institute
judicial proceedings for the collection of its credit.[109] Courts have has the power[110] to determine their
reasonableness[111]based on quantum meruit[112] and to reduce[113] the amount thereof if excessive.[114]

In addition, the disqualification argument in the Affidavit of Publication raised by petitioners no longer
holds water, inasmuch as Act 496[115] has repealed the Spanish Notarial Law.[116] In the same vein, their
engagement of their counsel in another capacity concurrent with the practice of law is not prohibited, so
long as the roles being assumed by such counsel is made clear to the client.[117] The only reason for this
clarification requirement is that certain ethical considerations operative in one profession may not be so
in the other.[118]

Debt Relief Package

Not Availed Of

We also affirm the CA's disquisition on the debt relief package (DRP).

Respondent's Circular is not an outright grant of assistance or extension of payment,[119] but a mere
offer subject to specific terms and conditions.

Petitioner NSBCI failed to establish satisfactorily that it had been seriously and directly affected by the
economic slowdown in the peripheral areas of the then US military bases. Its allegations, devoid of any
verification, cannot lead to a supportable conclusion. In fact, for short-term loans, there is still a need to
conduct a thorough review of the borrower's repayment possibilities.[120]

Neither has Petitioner NSBCI shown enough margin of equity,[121] based on the latest loan value of hard
collaterals,[122] to be eligible for the package. Additional accommodations on an unsecured basis may be
granted only when regular payment amortizations have been established, or when the merits of the
credit application would so justify.[123]

The branch manager's recommendation to restructure or extend a total outstanding loan not
exceeding P8,000,000 is not final, but subject to the approval of respondent's Branches Department
Credit Committee, chaired by its executive vice-president.[124] Aside from being further conditioned on
other pertinent policies of respondent,[125] such approval nevertheless needs to be reported to its Board
of Directors for confirmation.[126] In fact, under the General Banking Law of 2000,[127] banks shall grant
loans and other credit accommodations only in amounts and for periods of time essential to the
effective completion of operations to be financed, "consistent with safe and sound banking
practices."[128] The Monetary Board -- then and now -- still prescribes, by regulation, the conditions and
limitations under which banks may grant extensions or renewals of their loans and other credit
accommodations.[129]

Entries in Subsidiary Ledgers

Regular and Correct
Contrary to petitioners' assertions, the subsidiary ledgers of respondent properly reflected all entries
pertaining to Petitioner NSBCI's loan accounts. In accordance with the Generally Accepted Accounting
Principles (GAAP) for the Banking Industry,[130] all interests accrued or earned on such loans, except
those that were restructured and non-accruing,[131] have been periodically taken into
income.[132] Without a doubt, the subsidiary ledgers in a manual accounting system are mere private
documents[133] that support and are controlled by the general ledger.[134] Such ledgers are neither
foolproof nor standard in format, but are periodically subject to audit. Besides, we go by the
presumption that the recording of private transactions has been fair and regular, and that the ordinary
course of business has been followed.

Second Main Issue:

Extrajudicial Foreclosure Valid, But
Deficiency Claims Excessive

Respondent aptly exercised its option to "foreclose the mortgage,"[135] after petitioners had failed to pay
all the Notes in full when they fell due.[136] The extrajudicial sale and subsequent proceedings are
therefore valid, but the alleged deficiency claim cannot be recovered.

Auction Price Adequate

In the accessory contract[137] of real mortgage,[138] in which immovable property or real rights thereto are
used as security[139] for the fulfillment of the principal loan obligation,[140] the bid price may be lower
than the property's fair market value.[141] In fact, the loan value itself is only 70 percent of the appraised
value.[142] As correctly emphasized by the appellate court, a low bid price will make it easier[143] for the
owner to effect redemption[144] by subsequently reacquiring the property or by selling the right to
redeem and thus recover alleged losses. Besides, the public auction sale has been regularly and fairly
conducted,[145] there has been ample authority to effect the sale,[146] and the Certificates of Title can be
relied upon. No personal notice[147] is even required,[148] because an extrajudicial foreclosure is an
action in rem, requiring only notice by publication and posting, in order to bind parties interested in the
foreclosed property.[149]

As no redemption[150] was exercised within one year after the date of registration of the Certificate of
Sale with the Registry of Deeds,[151] respondent -- being the highest bidder -- has the right to a writ of
possession, the final process that will consummate the extrajudicial foreclosure. On the other hand,
petitioner-spouses, who are mortgagors herein, shall lose all their rights to the property.[152]

No Deficiency Claim Receivable

After the foreclosure and sale of the mortgaged property, the Real Estate Mortgage is extinguished.
Although the mortgagors, being third persons, are not liable for any deficiency in the absence of a
contrary stipulation,[153] the action for recovery of such amount -- being clearly sureties to the principal
obligation -- may still be directed against them.[154] However, respondent may impose only the
stipulated interest rates of 19.5 percent and 21.5 percent on the respective availments -- subject to the
12 percent legal rate revision upon automatic conversion into medium-term loans -- plus 1 percent
attorney's fees, without additional charges on penalty, insurance or any increases thereof.

Accordingly, the excessive interest rates in the Statements of Account sent to petitioners are reduced to
19.5 percent and 21.5 percent, as stipulated in the Promissory Notes; upon loan conversion, these rates
are further reduced to the legal rate of 12 percent. Payments made by petitioners are pro-rated, the
charges on penalty and insurance eliminated, and the resulting total unpaid principal and interest
of P6,582,077.70 as of the date of public auction is then subjected to 1 percent attorney's fees. The total
outstanding obligation is compared to the bid price. On the basis of these rates and the comparison
made, the deficiency claim receivable amounting to P2,172,476.43 in fact vanishes. Instead, there is an
overpayment by more than P3 million, as shown in the following Schedules:

SCHEDULE 1: PN (1) drawdown

P 5,000,000.00
amount on 6/29/89
Less: Interest deducted in
advance (per 6/13/89 Disclosure 305,165.00
Statement)
Net proceeds 4,694,835.00
Principal 5,000,000.00
Add:
Interest at
19.5% p.a.
10/28/89-12/31/89
(5,000,000 x 19.5% x 173,630.14
[65/365])
1/1/90-1/5/90
(5,000,000 x 19.5% 13,356.16 186,986.30 186,986.30
x [5/365])
Amount due as of
5,186,986.30
1/5/90
Less: Payment on 1/5/90
543,807.61 543,807.61
(pro-rated upon interest)
Balance (356,821.30) 4,643,178.70
Add:
Interest at
19.5% p.a.
1/6/90-3/30/90
([5,000,000-356,821.30] 208,370.59 208,370.59
x 19.5% x [84/365])
Amount due as of
4,851,549.29
3/30/90
Less: Payment on 3/30/90
163,182.85 163,182.85
(pro-rated upon interest)
Balance 45,187.75 4,688,366.44
Add:
Interest at
19.5% p.a.
3/31/90-5/31/90
([5,000,000-356,821.30] 153,797.34 153,797.34
x 19.5% x [62/365])
Amount due as of
198,985.09 4,842,163.79
5/31/90
 Less: Payment on 5/31/90
199,806.42 199,806.42
(pro-rated upon interest)
Balance (821.33) 4,642,357.36
Add:
Interest at
19.5% p.a.
6/1/90-6/29/90
([5,000,000-
71,924.74 71,924.74
(356,821.30+821.33)] x
19.5% x [29/365])
Amount due as of
4,714,282.11
6/29/90
Less: Payment on 6/29/90
839,012.66 839,012.66
(pro-rated upon interest)
Balance (767,087.92) 3,875,269.44

Add:
Interest at 19.5%
p.a.
6/30/90-12/31/90 ([5,000,000-
(356,821.30+821.33+767,087.92)] x 383,014.64
19.5% x [185/365])
1/1/91-6/29/91 ([5,000,000-
(356,821.30+821.33+767,087.92)] 372,662.90
x 19.5% x [180/365])
Interest at 12% p.a. upon
automatic conversion
6/30/91-8/8/91 ([5,000,000-
(356,821.30+821.33+767,087.92)] 50,962.45 806,639.99 806,639.99
x 12% x [40/365])
Amount due as of
4,681,909.43
8/8/91
Less: Payment on 8/8/91 (pro-
493,906.31 493,906.31
rated upon interest)
Balance 312,733.68 4,188,003.13
Add:
Interest at 12%
p.a.
8/9/91-8/15/91 ([5,000,000-
(356,821.30+821.33+767,087.92)] 8,918.43 8,918.43
x 12% x [7/365])
Amount due as of
321,652.11 4,196,921.55
8/15/91
Less: Payment on 8/15/91
86,593.37 86,593.37
(pro-rated upon interest)
Balance 235,058.74 4,110,328.18
Add:
Interest at 12%
 p.a.
8/16/91-11/29/91 ([5,000,000-
(356,821.30+821.33+767,087.92)] x 135,050.49 135,050.49
12% x [106/365])
Amount due as of
370,109.22 4,245,378.67
11/29/91
Less: Payment on 11/29/91
161,096.81 161,096.81
(pro-rated upon interest)
Balance 209,012.41 4,084,281.86
Add:
Interest at 12%
p.a.
11/30/91-12/20/91 ([5,000,000-
(356,821.30+821.33+767,087.92)] x 26,755.28 26,755.28
12% x [21/365])
Amount due as of
235,767.70 4,111,037.14
12/20/91
Less: Payment on 12/20/91
162,115.78 162,115.78
(pro-rated upon interest)
Balance 73,651.92 3,948,921.37
Add:
Interest at 12%
p.a.
12/21/91-12/31/91 ([5,000,000-
(356,821.30+821.33+767,087.92)] x 14,281.03
12% x [11/365])
1/1/92-2/26/92 ([5,000,000-
(356,821.30+821.33+767,087.92)] 74,001.70 88,282.74 88,282.74
x 12% x [57/365])
Amount due on PN (1) as of
161,934.66P4,037,204.10
2/26/92

SCHEDULE 2: PN (2)
drawdown amount on P 2,700,000.00
9/1/89
Less: Interest deducted in
advance (per 9/1/89 Disclosure 180,559.88
Statement)
Net proceeds 2,519,440.12
Principal 2,700,000.00
Add:
Interest at
21.5% p.a.
12/31/89 (2,700,000
1,590.41
x 21.5% x [1/365])
1/1/90-1/5/90
(2,700,000 x 21.5% x 7,952.05 9,542.47 9,542.47
[5/365])
 Amount due as of
2,709,542.47
1/5/90
Less: Payment on 1/5/90
27,752.12 27,752.12
(pro-rated upon interest)
Balance (18,209.65) 2,681,790.35
Add:
Interest at
21.5% p.a.
1/6/90-3/30/90
([2,700,000-18,209.65] x 132,693.52 132,693.52
21.5% x [84/365])
Amount due as of
2,814,483.87
3/30/90
Less: Payment on 3/30/90
103,917.28 103,917.28
(pro-rated upon interest)
Balance 28,776.23 2,710,566.58
Add:
Interest at
21.5% p.a.
3/31/90-5/31/90
([2,700,000-18,209.65] x 97,940.45 97,940.45
21.5% x [62/365])
Amount due as of
126,716.69 2,808,507.04
5/31/90
Less: Payment on 5/31/90
127,239.72 127,239.72
(pro-rated upon interest)
Balance (523.04) 2,681,267.31
Add:
Interest at
21.5% p.a.
6/1/90-6/29/90
([2,700,000-
45,801.92 45,801.92
(18,209.65+523.04)] x
21.5% x [29/365])
Amount due as of
2,727,069.24
6/29/90
Less: Payment on 6/29/90
534,286.14 534,286.14
(pro-rated upon interest)
Balance (488,484.22) 2,192,783.10

Add:
Interest at 21.5%
p.a.
6/30/90-12/31/90 ([2,700,000-
(18,209.65+523.04+488,484.22)] x 238,953.28
21.5% x [185/365])
1/1/91-8/8/91 ([2,700,000-
284,160.66523,113.94 523,113.94
(18,209.65+523.04+488,484.22)]
 x 21.5% x [220/365])
Amount due as of
2,715,897.04
8/8/91
Less: Payment on 8/8/91
320,303.08 320,303.08
(pro-rated upon interest)
Balance 202,810.86 2,395,593.95
Add:
Interest at 21.5%
p.a.
8/9/91-8/15/91 ([2,700,000-
(18,209.65+523.04+488,484.22)] 9,041.48 9,041.48
x 21.5% x [7/365])
Amount due as of
211,852.33 2,404,635.43
8/15/91
Less: Payment on 8/15/91
57,033.69 57,033.69
(pro-rated upon interest)
Balance 154,818.64 2,347,601.74
Add:
Interest at 21.5%
p.a.
8/16/91-9/1/91 ([2,700,000-
(18,209.65+523.04+488,484.22)] 21,957.87
x 21.5% x [17/365])
Interest at 12% p.a. upon
automatic conversion
9/2/91-11/29/91 ([2,700,000-
(18,209.65+523.04+488,484.22)] 64,161.43 86,119.30 86,119.30
x 12% x [89/365])
Amount due as of
240,937.94 2,433,721.04
11/29/91
Less: Payment on 11/29/91
104,872.65 104,872.65
(pro-rated upon interest)
Balance 136,065.30 2,328,848.39
Add:
Interest at 12%
p.a.
11/30/91-12/20/91 ([2,700,000-
(18,209.65+523.04+488,484.22)] 15,139.21 15,139.21
x 12% x [21/365])
Amount due as of
151,204.51 2,343,987.61
12/20/91
Less: Payment on 12/20/91
103,969.45 103,969.45
(pro-rated upon interest)
Balance 47,235.07 2,240,018.16
Add:
Interest at 12%
p.a.
12/21/91-12/31/91 ([2,700,000- 7,930.06
 (18,209.65+523.04+488,484.22)]
x 12% x [11/365])
1/1/92-2/26/92 ([2,700,000-
(18,209.65+523.04+488,484.22)] 41,092.15 49,022.22 49,022.22
x 12% x [57/365])
Amount due on PN (2) as of
96,257.28 P2,289,040.38
2/26/92

SCHEDULE 3: PN (3)
P 300,000.00
drawdown amount on 9/6/89
Less: Interest deducted in advance
20,062.21
(per 9/6/89 Disclosure Statement)
Net proceeds 279,937.79
Principal 300,000.00
Add:
Interest at
21.5% p.a.
1/5/90 (300,000 x
176.71 176.71
21.5% x [1/365])
Amount due as of
300,176.71
1/5/90
Less: Payment on 1/5/90 (pro-
513.93 513.93
rated upon interest)
Balance (337.22) 299,662.78
Add:
Interest at
21.5% p.a.
1/6/90-3/30/90 ([300,000-
14,827.15 14,827.15
337.22] x 21.5% x [84/365])
Amount due as of
314,489.93
3/30/90
Less: Payment on 3/30/90
11,611.70 11,611.70
(pro-rated upon interest)
Balance 3,215.45 302,878.24
Add:
Interest at
21.5% p.a.
3/31/90-5/31/90
([300,000-337.22] x 21.5% 10,943.85 10,943.85
x [62/365])
Amount due as of
14,159.30 313,822.08
5/31/90
Less: Payment on 5/31/90
14,217.74 14,217.74
(pro-rated upon interest)
Balance (58.44) 299,604.34
Add:
Interest at
21.5% p.a.
 6/1/90-6/29/90 ([300,000-
(337.22+58.44)] x 21.5% x 5,117.90 5,117.90
[29/365])
Amount due as of
304,722.24
6/29/90
Less: Payment on 6/29/90
59,701.04 59,701.04
(pro-rated upon interest)
Balance (54,583.14) 245,021.20

Add:
Interest at 21.5%
p.a.
6/30/90-12/31/90 ([300,000-
(337.22+58.44+54,583.14)] x 26,700.60
21.5% x [185/365])
1/1/91-8/8/91 ([300,000-
(337.22+58.44+54,583.14)]] x 31,752.06 58,452.66 58,452.66
21.5% x [220/365])
Amount due as of
303,473.86
8/8/91
Less: Payment on 8/8/91
35,790.61 35,790.61
(pro-rated upon interest)
Balance 22,662.05 267,683.25
Add:
Interest at 21.5%
p.a.
8/9/91-8/15/91 ([300,000-
(337.22+58.44+54,583.14)]] x 1,010.29 1,010.29
21.5% x [7/365])
Amount due as of
23,672.34 268,693.54
8/15/91
Less: Payment on 8/15/91
6,372.93 6,372.93
(pro-rated upon interest)
Balance 17,299.41 262,320.61
Add:
Interest at 21.5%
p.a.
8/16/91-9/6/91 ([300,000-
(337.22+58.44+54,583.14)]] x 3,175.21
21.5% x [22/365])
Interest at 12% p.a. upon
automatic conversion
9/7/91-11/29/91 ([300,000-
(337.22+58.44+54,583.14)]] x 6,766.61 9,941.82 9,941.82
12% x [84/365])
Amount due as of
27,241.23 272,262.43
11/29/91
Less: Payment on 11/29/91 11,857.24 11,857.24
(pro-rated upon interest)
Balance 15,383.98 260,405.18
Add:
Interest at 12%
p.a.
11/30/91-12/20/91 ([300,000-
(337.22+58.44+54,583.14)]] x 1,691.65 1,691.65
12% x [21/365])
Amount due as of
17,075.64 262,096.84
12/20/91
Less: Payment on 12/20/91
11,741.35 11,741.35
(pro-rated upon interest)
Balance 5,334.29 250,355.49
Add:
Interest at 12%
p.a.
12/21/91-12/31/91 ([300,000-
(337.22+58.44+54,583.14)]] x 886.10
12% x [11/365])
1/1/92-2/26/92 ([300,000-
(337.22+58.44+54,583.14)]] x 4,591.63 5,477.73 5,477.73
12% x [57/365])
Amount due on PN (3) as of
10,812.03 P 255,833.22
2/26/92

SCHEDULE 4: Application of Payments Upon Interest

Date Interest
Payable Pro-rated
1/5/90 PN (1) P 186,986.30 P 543,807.61
PN (2) 9,542.47 27,752.12
PN (3) 176.71 513.93
196,705.48 572,073.65
============== ==============
3/30/90 PN (1) 208,370.59 163,182.85
PN (2) 132,693.52 103,917.28
PN (3) 14,827.15 11,611.70
355,891.26 278,711.83
============== ===============
5/31/90 PN (1) 198,985.09 199,806.42
PN (2) 126,716.69 127,239.72
PN (3) 14,159.30 14,217.74
339,861.08 341,263.89
=============== ===============
6/29/90 PN (1) 71,924.74 839,012.66
PN (2) 45,801.92 534,286.14
PN (3) 5,117.90 59,701.04
122,844.56 1,432,999.84
=============== ===============
 8/8/91 PN (1) 806,639.99 493,906.31
PN (2) 523,113.94 320,303.08
PN (3) 58,452.66 35,790.61
1,388,206.59 850,000.00
================ ================
8/15/91 PN (1) 321,652.11 86,593.37
PN (2) 211,852.33 57,033.69
PN (3) 23,672.34 6,372.93
557,176.79 150,000.00
================ ================
11/29/91 PN (1) 370,109.22 161,096.81
PN (2) 240,937.94 104,872.65
PN (3) 27,241.23 11,857.24
638,288.39 277,826.70
================ ================
12/20/91 PN (1) 235,767.70 162,115.78
PN (2) 151,204.51 103,969.45
PN (3) 17,075.64 11,741.35
P 404,047.85 P 277,826.57
============== ===============

In the preparation of the above-mentioned schedules, these basic legal principles were followed:

First, the payments were applied to debts that were already due.[155] Thus, when the first payment was
made and applied on January 5, 1990, all Promissory Notes were already due.

Second, payments of the principal were not made until the interests had been covered.[156] For instance,
the first payment on January 15, 1990 had initially been applied to all interests due on the notes, before
deductions were made from their respective principal amounts. The resulting decrease in interest
balances served as the bases for subsequent pro-ratings.

Third, payments were proportionately applied to all interests that were due and of the same nature and
burden.[157] This legal principle was the rationale for the pro-rated computations shown on Schedule 4.

Fourth, since there was no stipulation on capitalization, no interests due and unpaid were added to the
principal; hence, such interests did not earn any additional interest.[158]The simple -- not compounded --
method of interest calculation[159] was used on all Notes until the date of public auction.

In fine, under solutio indebiti[160] or payment by mistake,[161] there is no deficiency receivable in favor of
PNB, but rather an excess claim or surplus[162] payable by respondent; this excess should immediately be
returned to petitioner-spouses or their assigns -- not to mention the buildings and improvements[163] on
and the fruits of the property -- to the end that no one may be unjustly enriched or benefited at the
expense of another.[164] Such surplus is in the amount of P3,686,101.52, computed as follows:
Total unpaid principal and interest on the
promissory notes as of February 26, 1992:
Drawdown on June 29, 1989
P4,037,204.10
(Schedule 1)
Drawdown on September 1, 1989 2,289,040.38
(Schedule 2)
Drawdown on September 6, 1989
255,833.22
(Schedule 3)
6,582,077.70
Add: 1% attorney's fees 65,820.78
Total outstanding obligation 6,647,898.48
Less: Bid price 10,334,000.00
Excess P 3,686,101.52
Joint and Solidary Agreement. Contrary to the contention of the petitioner-spouses, their Joint and
Solidary Agreement (JSA)[165] was indubitably a surety, not a guaranty.[166] They consented to be jointly
and severally liable with Petitioner NSBCI -- the borrower -- not only for the payment of all sums due and
payable in favor of respondent, but also for the faithful and prompt performance of all the terms and
conditions thereof.[167] Additionally, the corporate secretary of Petitioner NSBCI certified as early as
February 23, 1989, that the spouses should act as such surety.[168] But, their solidary liability should be
carefully studied, not sweepingly assumed to cover all availments instantly.

First, the JSA was executed on August 31, 1989. As correctly adverted to by petitioners,[169] it covered
only the Promissory Notes of P2,700,000 and P300,000 made after that date. The terms of a contract of
suretyship undeniably determine the surety's liability[170] and cannot extend beyond what is stipulated
therein.[171] Yet, the total amount petitioner-spouses agreed to be held liable for was P7,700,000; by the
time the JSA was executed, the first Promissory Note was still unpaid and was thus brought within the
JSA's ambit.[172]

Second, while the JSA included all costs, charges and expenses that respondent might incur or sustain in
connection with the credit documents,[173] only the interest was imposed under the pertinent Credit
Agreements. Moreover, the relevant Promissory Notes had to be resorted to for proper valuation of the
interests charged.

Third, although the JSA, as a contract of adhesion, should be taken contra proferentum against the party
who may have caused any ambiguity therein, no such ambiguity was found. Petitioner-spouses, who
agreed to be accommodation mortgagors,[174] can no longer be held individually liable for the entire
onerous obligation[175] because, as it turned out, it was respondent that still owed them.

To summarize, to give full force to the Truth in Lending Act, only the interest rates of 19.5 percent and
21.5 percent stipulated in the Promissory Notes may be imposed by respondent on the respective
availments. After 730 days, the portions remaining unpaid are automatically converted into medium-
term loans at the legal rate of 12 percent. In all instances, the simple method of interest computation is
followed. Payments made by petitioners are applied and pro-rated according to basic legal principles.
Charges on penalty and insurance are eliminated, and 1 percent attorney's fees imposed upon the total
unpaid balance of the principal and interest as of the date of public auction. The P2 million deficiency
claim therefore vanishes, and a refund of P3,686,101.52 arises.

WHEREFORE, this Petition is hereby PARTLY GRANTED. The Decision of the Court of Appeals
is AFFIRMED, with the MODIFICATIONthat PNB is ORDERED to refund the sum of P3,686,101.52
representing the overcollection computed above, plus interest thereon at the legal rate of six percent
(6%) per annum from the filing of the Complaint until the finality of this Decision. After this Decision
becomes final and executory, the applicable rate shall be twelve percent (12%) per annum until its
satisfaction. No costs.
SO ORDERED.

[G.R. NO. 161397 : June 30, 2005]

DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner, v. FELIPE P. ARCILLA, JR., Respondent.

[G.R. NO. 161426 : June 30, 2005]

FELIPE P. ARCILLA, JR., Petitioner, v. DEVELOPMENT BANK OF THE PHILIPPINES, Respondent.

DECISION

CALLEJO, SR., J.:

Atty. Felipe P. Arcilla, Jr. was employed by the Development Bank of the Philippines (DBP) in October
1981. About five or six months thereafter, he was assigned to the legal department, and thereafter,
decided to avail of a loan under the Individual Housing Project (IHP) of the bank.1 On September 12,
1983, DBP and Arcilla executed a Deed of Conditional Sale2 over a parcel of land, as well as the house to
be constructed thereon, for the price of P160,000.00. Arcilla borrowed the said amount from DBP for
the purchase of the lot and the construction of a residential building thereon. He obliged himself to pay
the loan in 25 years, with a monthly amortization of P1,417.91, with 9% interest per annum, to be
deducted from his monthly salary.3

DBP obliged itself to transfer the title of the property upon the payment of the loan, including any
increments thereof. It was also agreed therein that if Arcilla availed of optional retirement, he could
elect to continue paying the loan, provided that the loan/amount would be converted into a regular real
estate loan account with the prevailing interest assigned on real estate loans, payable within the
remaining term of the loan account.4

Arcilla was notified of the periodic release of his loan.5 During the period of July 1984 to December 31,
1986, the monthly amortizations for the said account were deducted from his monthly salary, for which
he was issued receipts.6

The monthly amortization was increased to P1,468.92 in November 1984, and to P1,691.51 beginning
January 1985. However, Arcilla opted to resign from the bank in December 1986. Conformably with the
Deed of Conditional Sale, the bank informed him, on June 11, 1987, that the balance of his loan account
with the bank had been converted to a regular housing loan, thus:

Amount converted Monthly

Interest Rate Remaining Term
to PHLoan Amortization
P 155,218.79 - 1 9% 22 yrs. & 6 mos P1,342.72
6,802.45 - 2 9% 21 yrs. & 10 mos. 59.41
24,342.91 - 3 9% 22 yrs. 212.07

Plus: MRI at PC. 41/thousand P1,614.20

76.41

P186,364.15 Total P1,690.617

=========

On July 24, 1987, Arcilla signed three Promissory Notes8 for the total amount of P186,364.15. He was
also obliged to pay service charge and interests, as follows:

a.1 On the amount advanced or balance thereof that remains unpaid for 30 days* or less:

i. Interest on advances at 7% p.a. over DBP's borrowing cost:

ii. No 2% service charge

iii. No 8% penalty charge

a.2 On the amount advanced or balance thereof that remains unpaid for more than 30 days:

i. Interest on the advance at 7% p.a. ]

over DBP's borrowing cost; ]

ii. One time 2% service charge ] - - To be computed from

iii. Interest on the service charge ] the start of the 30-day

iv. 8% penalty charge on the balances ] ‌ ‌ period

of the advances and service charge.9

Arcilla also agreed to pay to DBP the following:

*Insurance Premiums - 30-day period to be computed from date of advances

Other Advances - 30-day period to be computed from date of notification

b. Taxes

b.1 One time service charge 2% of the amount advanced

b.2 Interest and penalty charge Interest - 7% p.a. over borrowing cost
Penalty charge - 8% p.a. if unpaid
after 30 days from date of advance

i. Interest of the advance at ]

 7% p.a. over DBP's ]

borrowing costs; ] - - To be computed from start of 30-day period

ii. One time 2% service charge ]

iii. Interest on the service charge ]

iv. 8% penalty charge on the ]

balances of the advance and ]
service charge. ]

*Insurance Premiums - 30-day period to be computed from date of advances.

Other Advances - 30-day period to be computed from date of notification.

b. Taxes

b.1 One time service charge 2% of the amount advanced

b.2 Interest and penalty charge Interest - 7% p.a. over borrowing cost
Penalty charge - 8% p.a. if unpaid
after 30 days from date of advance

However, Arcilla also agreed to the reservation by the DBP of its right to increase (with notice to him)
the "rate of interest on the loan, as well as all other fees and charges on loans and advances pursuant to
such policy as it may adopt from time to time during the period of the loan; Provided, that the rate of
interest on the loan shall be reduced by law or by the Monetary Board; Provided, further, that the
adjustment in the rate of interest shall take effect on or after the effectivity of the increase or decrease
in the maximum rate of interest."10

Upon his request, DBP agreed to grant Arcilla an additional cash advance of P32,000.00. Thereafter, on
May 23, 1984, a Supplement to the Conditional Sale Agreement was executed in which DBP and Arcilla
agreed on the following terms of the loan:

Amount Interest Rate Per Annum Terms Amortization

P32,000.00 Nine (9%) per cent MRI for 24 years P271.57

P32,000.00 at P0.40/1,000.00
12.80

P32,000.00 same to be consolidated with the (Est.

original advance in accordance Amort.) P 284.37
with Condition No. 8 hereof.11 =========

The additional advance was, thus, consolidated to the outstanding balance of Arcilla's original advance,
payable within the remaining term thereof at 9% per annum. However, he failed to pay his loan account,
advances, penalty charges and interests which, as of October 31, 1990, amounted to P241,940.93.12 DBP
rescinded the Deed of Conditional Sale by notarial act on November 27, 1990.13 Nevertheless, it wrote
Arcilla, on January 3, 1992, giving him until October 24, 1992, within which to repurchase the property
upon full payment of the current appraisal or updated total, whichever is lesser; in case of failure to do
so, the property would be advertised for bidding.14 DBP reiterated the said offer on October 7,
1992.15 Arcilla failed to respond. Consequently, the property was advertised for sale at public bidding on
February 14, 1994.16

Arcilla filed a complaint against DBP with the Regional Trial Court (RTC) of Antipolo, Rizal, on February
21, 1994. He alleged that DBP failed to furnish him with the disclosure statement required by Republic
Act (R.A.) No. 3765 and Central Bank (CB) Circular No. 158 prior to the execution of the deed of
conditional sale and the conversion of his loan account with the bank into a regular housing loan
account. Despite this, DBP immediately deducted the account from his salary as early as 1984. Moreover,
the bank applied its own formula and imposed its usurious interests, penalties and charges on his loan
account and advances. He further alleged, thus:

13. That when plaintiff could no longer cope-up with defendant's illegal and usurious impositions, the
DBP unilaterally increased further the rate of interest, without notice to the latter, and heaped-up
usurious interests, penalties and charges;

---

14. That to further bend the back of the plaintiff, defendant rescinded the subject deed of conditional
sale on 4 December 1990 without giving due notice to plaintiff;

15. That much later, on 10 October 1993, plaintiff received a letter from defendant dated 19 September
1993, informing plaintiff that the subject deed of conditional sale was already rescinded on 4 December
1990 (xerox copy of the same is hereto attached and made an integral part hereof as Annex "C"; 17

In its answer to the complaint, the DBP alleged that it substantially complied with R.A. No. 3765 and CB
Circular No. 158 because the details required in said statements were particularly disclosed in the
promissory notes, deed of conditional sale and the required notices sent to Arcilla. In any event, its
failure to comply strictly with R.A. No. 3765 did not affect the validity and enforceability of the subject
contracts or transactions. DBP interposed a counterclaim for the possession of the property.

On April 27, 2001, the trial court rendered judgment in favor of Arcilla and nullified the notarial
rescission of the deeds executed by the parties. The fallo of the decision reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and against the
defendant.ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

Defendant is hereby directed to furnish the disclosure statement to the plaintiff within five (5) days
upon receipt hereof in the manner and form provided by R.A. No. 3765 and submit to this Court for
approval the total obligation of the plaintiff as of this date, within ten (10) days from receipt of this
order. The Notarial Rescission (Exh. "16") dated November 27, 1990 is hereby declared null and void.
Costs against the defendant.

SO ORDERED.18
DBP appealed the decision to the Court of Appeals (CA) wherein it made the following assignment of
errors:

4.1. The trial court erred in ruling that the provision of the details of the loan without the issuance of a
"Disclosure Statement" is not compliance with the "Truth in Lending Act;"

4.2. The trial court erred in declaring the Notarial Rescission null and void; andcralawlibrary

4.3. The trial court erred in denying DBP's counterclaims for recovery of possession, back rentals and
litigation expenses.19

On May 29, 2003, the CA rendered judgment setting aside and reversing the decision of the RTC. In
ordering the dismissal of the complaint, the appellate court ruled that DBP substantially complied with
R.A. No. 3765 and CB Circular No. 158. Arcilla filed a motion for reconsideration of the decision. For its
part, DBP filed a motion for partial reconsideration of the decision, praying that Arcilla be ordered to
vacate the property. However, the appellate court denied both motions.

The parties filed separate Petitions for Review on Certiorari with this Court. The first petition,
entitled Development Bank of the Philippines v. Court of Appeals, was docketed as G.R. No. 161397; the
second petition, entitled Felipe Arcilla, Jr. v. Court of Appeals, was docketed as G.R. No. 161426. The
Court resolved to consolidate the two cases.

The issues raised in the two petitions are the following: a) whether or not petitioner DBP complied with
the disclosure requirement of R.A. No. 3765 and CB Circular No. 158, Series of 1978, in the execution of
the deed of conditional sale, the supplemental deed of conditional sale, as well as the promissory notes;
and b) whether or not respondent Felipe Arcilla, Jr. is mandated to vacate the property and pay rentals
for his occupation thereof after the notarial rescission of the deed of conditional sale was rescinded by
notarial act, as well as the supplement executed by DBP.

On the first issue, Arcilla avers that under R.A. No. 3765 and CB Circular No. 158, the DBP, as the creditor
bank, was mandated to furnish him with the requisite information in such form prescribed by the
Central Bank before the commutation of the loan transaction. He avers that the disclosure of the details
of the loan contained in the deed of conditional sale and the supplement thereto, the promissory notes
and release sheet, do not constitute substantial compliance with the law and the CB Circular. He avers
that the required disclosure did not include the following:

'[T]he percentage of Finance Charges to Total Amount Financed (Computed in accordance with Sec. 2(i)
of CB Circular 158; the Additional Charges in case certain stipulations in the contract are not met by the
debtor; Total Non-Finance Charges; Total Finance Charges, Effective Interest Rate, etc. '20

Arcilla further posits that the failure of DBP to comply with its obligation under R.A. No. 3765 and CB
Circular No. 158 forecloses its right to rescind the transaction between them, and to demand
compliance of his obligation arising from said transaction. Moreover, the bank had no right to deduct
the monthly amortizations from his salary without first complying with the mandate of R.A. No. 3765.

DBP, on the other hand, avers that all the information required by R.A. No. 3765 was already contained
in the loan transaction documents. It posits that even if it failed to comply strictly with the disclosure
requirement of R.A. No. 3765, nevertheless, under Section 6(b) of the law, the validity and enforceability
of any action or transaction is not affected. It asserts that Arcilla was estopped from invoking R.A. No.
3765 because he failed to demand compliance with R.A. No. 3765 from the bank before the
consummation of the loan transaction, until the time his complaint was filed with the trial court.

In its petition in G.R. No. 161397, DBP asserts that the RTC erred in not rendering judgment on its
counterclaim for the possession of the subject property, and the liability of Arcilla for rentals while in the
possession of the property after the notarial rescission of the deeds of conditional sale. For his part,
Arcilla (in G.R. No. 161426) insists that the respondent failed to comply with its obligation under R.A. No.
3765; hence, the notarial rescission of the deed of conditional sale and the supplement thereof was null
and void. Until DBP complies with its obligation, he is not obliged to comply with his.

The petition of Arcilla has no merit.

Section 1 of R.A. No. 3765 provides that prior to the consummation of a loan transaction, the bank, as
creditor, is obliged to furnish a client with a clear statement, in writing, setting forth, to the extent
applicable and in accordance with the rules and regulations prescribed by the Monetary Board of the
Central Bank of the Philippines, the following information:

(1) the cash price or delivered price of the property or service to be acquired;

(2) the amounts, if any, to be credited as down payment and/or trade-in;

(3) the difference between the amounts set forth under clauses (1) and (2);

(4) the charges, individually itemized, which are paid or to be paid by such person in connection with the
transaction but which are not incident to the extension of credit;

(5) the total amount to be financed;

(6) the finance charges expressed in terms of pesos and centavos; andcralawlibrary

(7) the percentage that the finance charge bears to the total amount to be financed expressed as a
simple annual rate on the outstanding unpaid balance of the obligation.

Under Circular No. 158 of the Central Bank, the information required by R.A. No. 3765 shall be included
in the contract covering the credit transaction or any other document to be acknowledged and signed by
the debtor, thus:

The contract covering the credit transaction, or any other document to be acknowledged and signed by
the debtor, shall indicate the above seven items of information. In addition, the contract or document
shall specify additional charges, if any, which will be collected in case certain stipulations in the contract
are not met by the debtor.

Furthermore, the contract or document shall specify additional charges, if any, which will be collected in
case certain stipulations in the contract are not met by the debtor.21
If the borrower is not duly informed of the data required by the law prior to the consummation of the
availment or drawdown, the lender will have no right to collect such charge or increases thereof, even if
stipulated in the promissory note.22 However, such failure shall not affect the validity or enforceability of
any contract or transaction.23

In the present case, DBP failed to disclose the requisite information in the disclosure statement form
authorized by the Central Bank, but did so in the loan transaction documents between it and Arcilla.
There is no evidence on record that DBP sought to collect or collected any interest, penalty or other
charges, from Arcilla other than those disclosed in the said
deeds/documents.ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

The Court is convinced that Arcilla's claim of not having been furnished the data/information required
by R.A. No. 3765 and CB Circular No. 158 was but an afterthought. Despite the notarial rescission of the
conditional sale in 1990, and DBP's subsequent repeated offers to repurchase the property, the latter
maintained his silence. Arcilla filed his complaint only on February 21, 1994, or four years after the said
notarial rescission. The Court finds and so holds that the following findings and ratiocinations of the CA
are correct:

After a careful perusal of the records, We find that the appellee had been sufficiently informed of the
terms and the requisite charges necessarily included in the subject loan. It must be stressed that the
Truth in Lending Act (R.A. No. 3765), was enacted primarily "to protect its citizens from a lack of
awareness of the true cost of credit to the user

by using a full disclosure of such cost with a view of preventing the uninformed use of credit to the
detriment of the national economy" (Emata v. Intermediate Appellate Court, 174, SCRA 464 [1989]; Sec.
2, R.A. No. 3765). Contrary to appellee's claim that he was not sufficiently informed of the details of the
loan, the records disclose that the required informations were readily available in the three (3)
promissory notes he executed. Precisely, the said promissory notes were executed to apprise appellee
of the remaining balance on his loan when the same was converted into a regular housing loan. And on
its face, the promissory notes signed by no less than the appellee readily shows all the data required by
the Truth in Lending Act (R.A. No. 3765).

Apropos, We agree with the appellant that appellee, a lawyer, would not be so gullible or negligent as to
sign documents without knowing fully well the legal implications and consequences of his actions, and
that appellee was a former employee of appellant. As such employee, he is as well presumed
knowledgeable with matters relating to appellant's business and fully cognizant of the terms of the loan
he applied for, including the charges that had to be paid.

It might have been different if the borrower was, say, an ordinary employee eager to buy his first house
and is easily lured into accepting onerous terms so long as the same is payable on installments. In such
cases, the Court would be disposed to be stricter in the application of the Truth in Lending Act, insisting
that the borrower be fully informed of what he is entering into. But in the case at bar, considering
appellee's education and training, We must hold, in the light of the evidence at hand, that he was duly
informed of the necessary charges and fully understood their implications and effects. Consequently,
the trial court's annulment of the rescission anchored on this ground was unjustified.24
Anent the prayer of DBP to order Arcilla to vacate the property and pay rentals therefor from 1990, a
review of the records has shown that it failed to adduce evidence on the reasonable amount of rentals
for Arcilla's occupancy of the property. Hence, the Court orders a remand of the case to the court of
origin, for the parties to adduce their respective evidence on the bank's counterclaim.

IN LIGHT OF ALL THE FOREGOING, the petition in G.R. No. 161426 is DENIED for lack of merit. The
petition in G.R. No. 161397 is
PARTIALLY GRANTED. Thecaseis hereby REMANDED to the Regional Trial Court of Antipolo, Rizal,
Branch 73, foritto resolve the counterclaim of the Development Bank of the Philippines for possession of
the property, and for the reasonable rentals for Felipe P. Arcilla, Jr.'s occupancy thereof after the
notarial rescission of the Deed of Conditional Sale in 1990.

Costs against petitioner Felipe P. Arcilla, Jr.

SO ORDERED.